Bootstrapping 101: How (and Why) to Self-Fund Your Startup

There's a great Silicon Valley scene in which the Pied Piper team visits another startup's offices. The startup has just gotten an infusion of VC money–which is pretty obvious, thanks to their sleek office, snooty secretary, and rows of fancy drinks.

"We get it, you're funded!" yells one of the Pied Piper guys irately.

This scene is both hilarious and accurate: there are a ton of companies running around with money to spare, in part because it has become much easier to get early stage capital.

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But not every business takes outside investment. You can choose to "bootstrap it," or

self-fund your startup. That means relying on savings, credit cards, side jobs, and sweat equity.

It also probably means no fancy coconut water.

Trying to decide whether or not to bootstrap? Here's what you need to know.

The Pros

Let's start with the obvious: when you bootstrap, you retain 100% of your company.

That means you have complete control over your startup's mission, product, and team. If you accept venture capital, on the other hand, you'll be answering to your investors–and most have strong opinions about how you should do things.

It also means you'll be on a timeline. Every VC is looking for that 10X (or better) return, and they want it as soon as possible. That also means they want you to start spending their money right away, and specifically on measures that'll make you grow more rapidly. The "slow and steady" strategy is definitely not compatible with the VC's approach; entrepreneurs who'd rather control their own growth rate should consider self-funding.

Bootstrapping also keeps you scrappy. Since you don't have the luxury of spending a single extra cent, you're forced to pay hawk-like attention to your operating costs and revenue. You'll become as efficient and resourceful as possible.

And, on a related note, bootstrapping also makes you more creative. If you've got a $4,000 marketing budget, as opposed to a $40,000 marketing budget, you'll think much more carefully about how to promote your startup for free.

Seeking investments also takes a lot of time. Instead of working with your team, you're out networking with investors, putting together pitch decks, practicing your elevator speech, actually giving those presentations, and sending email after email. It's an exhausting, multi-month process, and the odds are, most VCs you're meeting with are going to pass.

Final reason to consider self-funding: just because you don't raise now doesn't mean you can never raise. If you can achieve profitability on your own, you'll be a very attractive investment–not only will you have proven traction, but investors will be able to get in on a later-stage opportunity without the standard dilution.

The Cons

Let's say you've got a really unique product idea. You decide to bootstrap, so it takes you half a year to go to market. In that time, two other companies enter the space with similar products, and you lose your competitive advantage.

Yeah–you probably should've acquired VC funding.

Or maybe you've got a really unique product idea that will someday generate a lot of revenue, but not before swallowing a ton of money. Companies in this category include Facebook, Snapchat, Dropbox, and Evernote.

Generally, the startups that should seek VC money are in tech and/or new or emerging industries.

VC funding also comes with another bonus. When you need advice or feedback from someone who's likely dealt with tens or even hundreds of companies, your investors are eager to help. Furthermore, if you need connections to other influential people, they can make the intro or at least give you some insight.

And having a well-respected VC back you does enormous things for your credibility. If you're trying to hire an in-demand engineer, saying, "Andreessen Horowitz is one of our investors," would definitely get his or her attention.

Generate Revenue

Unlike many VC-funded startups, who have the luxury of building a huge audience or customer base before monetizing them (cough, Instagram, Postmates, Luxe), you need to focus on profitability from the get-go.

Guy Kawasaki, a well-known entrepreneurship expert, says concentrating on cash flow is even more important. In other words, if you're choosing between a $20,000 sale that'll take a year to close and a $5,000 sale that'll take two months, go for the latter–because your electric bill is due in 15 days.

If you can, Kawasaki says to establish a short sales cycle, short payment terms, and recurring revenue.

You should also create a minimum viable product as soon as possible. And get creative! Jason Boehmig wanted to develop a software platform that would enable businesses to automate routine legal paperwork. In the beginning, he sold customers "software" while actually doing the work himself behind-the-scenes.

Not only did this technique validate his idea, it also allowed him to use the money from his first sales to build his actual product. (Check out six more unique ways to build an MVP.)

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by Aja Frost via SitePoint